- Investing genius was a fraction of Munger’s brilliance
- A lattice of mental models for better decision making
- A small collection of Charlie’s quotes and wisdom
“The best thing a human being can do is to help another human being know more” – Charlie Munger
Very few things will change your trajectory in life (and/or business) as much as learning and education.
The more you dedicate your time to obtaining knowledge – the better you will be.
Business. Relationships. Investing.
You name it.
But take it a step further… the pathway your life takes will be a function of the decisions you make.
Every day we make “hundreds” of decisions.
Most of them are easily reversed or inconsequential (e.g., like walking through a two-way door) – however some are not (i.e., a one-way door)
It’s important to know the difference.
As we know, making a bad decision can be extremely costly.
We’ve all been there.
However it begs the question:
How does one make higher-quality decisions and/or fewer mistakes?
Decision making ‘skills’ are not taught in school.
English, physics, chemistry, biology and mathematics were all there.
But where was decision making?
For over three decades – I’ve learned making better decisions is one of the most important things you can do.
So why am I telling you this?
My journey to making better decisions started with Charlie Munger.
Thanks to his lifelong dedication to educate others – sharing what worked for him – he helped me make better decisions.
Yesterday – Nov 28th – we said farewell to one of the greatest thinkers we’ve been privileged to know.
Far More than an Investing Genius
“Lifelong learning is paramount to long-term success” – Charlie Munger
Early yesterday afternoon I was working at my desk.
One of my colleagues – Aileen – came running towards me… ‘Adrian, Adrian… have you seen the news?’ – waving her phone in the air.
“Your idol – Charlie – has passed away”.
Aileen had often heard me cite the wisdom of Munger – something he said or something I had read.
For example, at a Google offsite last year – we had a group ice-breaker which invited us to offer the “best book we’ve read”
I put forward “Poor Charlie’s Almanack”
Few had heard of it.
For those less familiar – Charlie was the Vice Chair of Berkshire Hathaway and Warren Buffett’s lifelong business partner, confidant, and friend.
He passed away one month short of his 100th birthday – which would have been January 1st.
When most people hear his name – they probably think ‘Buffett’s right-hand man’.
And whilst he was… the truth is he was a lot more than that.
For me, he was one of the greatest thinkers, educators and investors of the modern era.
That will be his real legacy.
A small list of resources offering tributes to Munger’s wisdom includes (and this is not exhaustive):
“Berkshire Hathaway could not have been built to its present status without Charlie’s inspiration, wisdom and participation“
To that end, it was Charlie who convinced Buffett to think beyond buying ‘mediocre’ companies at extremely cheap valuations.
He influenced Buffett to buy ‘wonderful’ (growing) companies at a ‘fair price’.
For example, names included (not limited to) “Coke, Procter & Gamble Co, Gillette, American Express, GEICO, Bank of America, Costco and more recently Apple”.
Here’s Buffett:
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price. Charlie understood this early; I was a slow learner.
And from there, the rest is history.
Very few in the investment game boast a record like Buffett and Munger have achieved over 57 years.
Unparalleled Investment Record
February last year I shared the investment record of Berkshire Hathaway.
The post was to illustrate to power of Compounded Annual Growth.
Repeating a small portion of the post:
- If you invested $1 with Berkshire Hathaway in 1965 – that dollar would be worth $36,416 today
- That’s over 3.6 million percent.
- That same dollar invested in the S&P 500 would be worth ~$302
I don’t believe there is another investor who comes close over this timeframe.
Bloomberg updated the record this week with two charts:
Achieving a CAGR of ~20% (double that of the market) over 57 years isn’t luck.
They were doing something right.
Now some will argue they got lucky with a few good stock picks.
And sure – that might be true.
The game of asset speculation is not without luck.
For example, some might suggest picking say Coca-Cola in the 1990s or Apple today.
Here’s the thing:
Munger is on record saying you only need to make a few good (stock) decisions in your entire life to do very well.
From his perspective, the larger percentage of Berkshire’s gains have come from a handful of their positions.
Personally, I don’t see anything wrong with that.
Others who are critical of Berkshire’s record may argue they were “opportunists” – taking advantage of rare market conditions to make exceptional investments.
For example, the deal they did with Goldman Sachs during the height of the financial crisis – getting terms not available to average investors.
Again, I don’t see the problem with that.
Berkshire were the only ones with ample cash and no debt. This gave them enormous leverage and financial flexibility.
My view is great investors are always opportunistic.
Put another way, they don’t simply swing at ‘every pitch’ which is thrown their way.
When Munger was talking with Becky Quick (CNBC) approx two weeks ago – he said one of the reasons he was successful was when an exceptional opportunity came his way – he took it.
However, this was something he had to learn.
For example, in Munger’s exceptional speech called ‘The Psychology of Human Misjudgement‘ – he offers this (early life) example:
I myself, the would-be instructor here, many decades ago made a big mistake caused in part by subconscious operation of my Deprival-Superreaction Tendency.
A friendly broker called and offered me 300 shares of ridiculously underpriced, very thinly traded Belridge Oil at $115 per share, which I purchased using cash I had on hand. The next day, he offered me 1,500 more shares at the same price, which I declined to buy partly because I could only have made the purchase had I sold something or borrowed the required $173,000.
This was a very irrational decision. I was a well-to-do man with no debt; there was no risk of loss; and similar no-risk opportunities were not likely to come along. Within two years, Belridge Oil sold out to Shell at a price of about $3,700 per share, which made me about $5.4 million poorer than I would have been had I then been psychologically acute. As this tale demonstrates, psychological ignorance can be very expensive.
Books to Read
If you are interested in becoming a better decision maker (and asset speculator) – I encourage you to read each of the following at least once:
These books will give a great insight into not only who he was – but how he thought through the process of decision making.
Charlie developed a framework of mental models – a “suit of tools” to help you navigate problems.
His way of thinking will help you understand the world.
These models span physics, math, probability, biology, systems thinking and many more.
Here are three simple mental models which come to mind (one’s I use regularly):
1. The mental model of “margin of safety” is one widely adopted by Berkshire. This is a model that helps you understand that things rarely go as planned.
2. The mental model of relativity. This shows us we all have blind spots. Your job is to know what they are. For example, if you can you start thinking through problems from different angles – it helps you visualise the problem from a new perspective. You will see the problem in a new light (otherwise previously not visible).
3. The mental model of inversion. Munger would often say “Invert. Always invert”. This model is a great way to avoid making stupid mistakes. For example, let’s say you have the problem of “how to get more customers“. The inversion of this problem is asking “how do I make our customers hate our products?” The answer will be all things you must absolutely not do – which will help you avoid making (basic) errors.
And so I slowly developed my own system of psychology, more or less in the self-help style of Ben Franklin and with the determination displayed in the refrain of the nursery story: “‘Then I’ll do it myself,’ said the little red hen.”
I was greatly helped in my quest by two turns of mind.
First, I had long looked for insight by inversion in the intense manner counselled by the great algebraist, Jacobi: “Invert, always invert.” I sought good judgement mostly by collecting instances of bad judgement, then pondering ways to avoid such outcomes.
Second, I became so avid a collector of instances of bad judgement that I paid no attention to boundaries between professional territories.
After all, why should I search for some tiny, unimportant, hard-to-find new stupidity in my own field when some large, important, easy-to- find stupidity was just over the fence in the other fellow’s professional territory?
Once you start reading more of Munger’s work – you will uncover hundreds of his mental models.
They will make you smarter.
Putting it All Together
It’s hard to express the difference Charlie Munger has made to my own life.
To that end, I think it’s important for people to find life mentors.
Those mentors may be alive or dead; someone you know; or even someone you don’t.
What we aim to do is stand on the shoulders of others.
We take advantage of what exceptionally smart people have already figured out.
For example, some mentors of mine include Charlie Munger, Ben Franklin, Albert Einstein, Charles Darwin, Warren Buffett, Socrates and Marcus Aurelius.
I devour anything they have written (n.b., I re-read Poor Richard’s Almanack last week – a collection of Ben Franklin’s missives)
Throughout Franklin’s book – you can hear the words of Munger.
In closing, very few of us will achieve what Charlie did. He was extraordinary and exceptionally generous. We can all aspire to stand on his shoulders and learn from his wisdom.
A couple of Charlie’s quotes to close:
- “If you’re not willing to react with equanimity to a market price decline of 50% two or three times a century, you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get”
- “It’s so simple. You spend less than you earn. Invest shrewdly, and avoid toxic people and toxic activities, and try and keep learning all your life, etcetera etcetera. And do a lot of deferred gratification because you prefer life that way. And if you do all those things you are almost certain to succeed. And if you don’t, you’re gonna need a lot of luck.”
- “The world is not driven by greed. It’s driven by envy. I have conquered envy in my own life. I don’t envy anybody. I don’t give a damn what someone else has. But other people are driven crazy by it.”
- “The best armor of old age is a well spent life preceding it”